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Tags: US | Economy

Consumer Inflation May be Peaking, Economists Say

Monday, 16 May 2011 06:55 AM EDT

After weeks of pain at the gas pump and the grocery store, the worst appears to be over.

Oil prices have fallen, with gas soon to follow. Demand for farm commodities, like the corn used in everything from cereal to soda, has dropped. And businesses remain slow to pass along higher costs because customers aren't getting raises and might walk away.

Inflation may be approaching its peak.

"I think the bulk of the big price increases are over," said Gus Faucher, an economist at Moody's Analytics.

Lower prices — or at least a break in their steady rise — will come as a big relief. Consumer prices rose 3.2 percent for the year ending in April, the most since October 2008. Higher food and gas prices drove the gains.

Excluding those two categories, prices rose 0.2 percent in April. They rose 1.3 percent over the past year, below what the Federal Reserve considers healthy. Economists study this figure, known as core inflation, because food and energy prices are volatile.

Some inflation can be healthy for the economy because it encourages people to spend and invest rather than sitting on their cash. More spending drives corporate growth, which makes businesses more likely to hire people.

Inflation was a much bigger concern in March. Oil prices were rising steadily because of the unrest in the Middle East. Some feared gas could reach $5 a gallon, leaving Americans much less money to spend on cars, appliances and vacations. That kind of drop in spending would squeeze corporate profits, delay hiring — maybe even tip the economy back into recession.

But last week, oil prices sank by the most in two and half years. Americans drive less when gas prices get high enough, and concerns about slowing energy demand sent oil prices tumbling — from $114 at the start of May to about $97 on Friday.

Now the nationwide average for gas has leveled off. On Friday it was just under $4 a gallon, where it's been for the past week. Many analysts say it could drop to $3.50 as soon as next month.

The prices of milk, bread and chicken won't fall as fast — it could take six months or longer, analysts say — but they could decline by the end of the year. That's because the price of corn and other grains have fallen. Overseas ranchers are using less corn for feed, and U.S. farmers have planted more.

Food prices had risen in March at the fastest rate in three years.

Changes in grain and corn prices take longer to filter down to grocery stores than changes in oil prices do to the gas pump. That's because grains and other commodities represent a smaller fraction of food costs in the U.S than in other countries. By contrast, oil prices are the biggest factor in the cost of gas.

There was evidence in Friday's government report on consumer prices that food inflation will slow by year's end. Gas prices rose 3.3 percent in April, a steep rise but the smallest since November. Food costs rose 0.4 percent, half as fast as in March.

Gas accounted for about half of overall inflation in April. So a decline in the price of oil should hold down the increase in consumer prices for May.

Slower inflation would leave Americans with more money to spend to stimulate the economy, including keeping more of a cut in Social Security taxes that took effect in January. Economists expect the increased spending to raise overall economic growth to an annual rate of 3 percent in the second half of this year. In the first three months of this year, it was 1.8 percent.

The oil price drop should bring prices down for a range of products, including chemicals, plastics, even roofing materials. Higher diesel fuels had contributed, for example, to a sharp increase in commodity costs for Procter & Gamble. In response, the company raised prices for Gillette razors, Duracell batteries and Bounty paper towels.

Falling corn prices should also help. Corn is widely used as an animal feed, so when it became more expensive, meat and dairy prices went up, too. Corn is also used in sweeteners for soft drinks and snacks, so those could become less expensive.

Prices of corn, wheat and other grains jumped last summer after bad weather damaged harvests in countries from Russia to Australia to Brazil. Demand for corn from producers of ethanol, a corn-based fuel, also rose. The price of a bushel of corn reached a record high of $7.76 on April 11.

But supply worries have since eased. An Agriculture Department report this week predicted that U.S. corn supplies will rise later this year, based on the drop in demand overseas and the larger crop expected next year. They had earlier been forecast to fall.

Demand from fast-growing developing countries such as China and India may also slow as their central banks raise interest rates to try to slow inflation. That should also slow their growth and, in turn, may cool their demand for commodities.

It takes about six months for changes in commodity prices to affect consumers. Consumer food prices didn't start to increase until January, well after commodity costs began rising last summer.

Analysts also say many companies were slow to pass along those increases for fear of spooking price-sensitive shoppers. Wage growth has been weak. Average hourly pay rose an anemic 1.9 percent in the last 12 months, less than the rate of inflation.

Some companies probably won't lower prices much, if at all. Airlines, for example, lost money because of the steady rise in the price of oil. If you bought a plane ticket three months ahead of time, your flight was much more expensive for the airline when you flew than when you bought.

"They will resist any pressures to reduce fares or fuel surcharges," says independent airline analyst Robert Mann.

The average price of a round-trip ticket during the first three months of this year was $341 before taxes. That was up 10 percent from the same period last year. Airlines paid 27 percent more for fuel from January through March than they did a year earlier.

But there will be relief in the prices of other things. The cost of new and used cars rose in April, but some of those increases were related to temporary parts shortages caused by the earthquake and nuclear disaster in Japan.

Inflation will remain a risk. Commodity prices are volatile and subject to global turmoil. As recently as last winter, economists were worried that inflation was too low. In October, the core price index had risen only 0.6 percent in a year, and the Fed expressed concern about the risk of falling prices.

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

After weeks of pain at the gas pump and the grocery store, the worst appears to be over.Oil prices have fallen, with gas soon to follow. Demand for farm commodities, like the corn used in everything from cereal to soda, has dropped. And businesses remain slow to pass along...
Monday, 16 May 2011 06:55 AM
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